After completing this topic students should be able to:
› Describe the different classifications of investments
› Outline the objectives of preparing consolidated financial statements (CFS)
› History of consolidation
› Understand the development of CFS
› Explain the concept of a group and describe the concept of control. AASB10. Apply the definition of control to examples likely to be found in practice
› Qantas Limited example
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Before we begin, let’s take stock of where we are at… › Wasn’t Fin A enough? Why are we still here?
› Developing knowledge of accounting/financial reporting
- Level 1
- Focus on basics
- Double entry, accounting records, accruals and end of period adjustments, financial statements, some accounting requirements (eg inventory, PPE)
- Level 2
- Knowledge of all prior study assumed
- Regulatory and financial reporting framework, reporting requirements,
- Level 3
- Knowledge of all prior study assumed
- From single reporting entity to group financial reporting
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Before we begin, let’s take stock of where we are at… › As you work up through the levels:
- Increasing role of professional judgement
- apply knowledge of accounting and understanding the effect on financial reports
- Appreciate the potential consequences of mistakes
- Appreciate the constantly changing nature of accounting requirements (standards)
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Leibler’s paper
› A key focus in this unit is the development of critical perspectives. Why is that necessary?
› …starting with Leibler
› Corporations Law – financial reports must both comply with accounting standards, and present a true and fair view
› Directors are doing a reasonable job at the former, but not so well with the latter
› Why? …
› Consider examples
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Our resources
› Text books? … a secondary resource
› Accounting Standards, guidance on true and fair, and our critical perspectives are the more fundamental resources
› But accounting standards are NOT easy reading (eg
AASB 9) and are undergoing significant almost constant change
› And what is true and fair?
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1. Types of interests in other entities
Possible types of investments include:
Trading ▬
Invest.
No control
Signftly ▬
Influenced
Jointly controlled ▬▬▬▬▬▬▬▬▬►
▬
Controlled entity Control
We can see “shades of influence” by investor over his/her investments in other entities on the above continuum
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2. Accounting for interests in other entities by investor
Type of investment Accounting technique Accounting standard Weeks covered
Controlled entity Consolidation accounting AASB 3
Weeks1-6
2
Significantly influenced Equity accounting
AASB 128
Week 7
3
Joint operation
Proportional consolidation AASB 11
Week 12
4
Other financial assets Cost / fair value
AASB 9
Week 11
1
AASB 10
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2. Accounting for interests in other entities by investor
› Businesses often operated via group structure where parent entity may control one or more subsidiaries
› Companies do business through group structure for a number of reasons:
-legal (limited liability)
-to isolate debt in one company
-to keep asset in one company for ease of management
-for tax/stamp duty reasons
-globalisation
-ease of enterprise:
- Easy to diversify through takeovers
- Achieve vertical/horizontal integration
11
Example of a group structure
12
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Some definitions
-To consolidate means to group the financial performance and position of a number of entities
